Bank of Canada Interest Rates Unchanged, Inflation Under Control

Surprise! The Bank of Canada kept their target for the overnight rate at its current level of 1%, the 9th straight time it’s done so since the last increase on September 2010. Well, let’s be honest, it really wasn’t a surprise, the decision was widely expected by industry experts.

The supporting commentary on the global and national outlook was more important this time around as the markets and economists were waiting to hear the Bank of Canada’s outlook on growth. More details will be supplied with the release of the Monetary Policy Report tomorrow, October 26, 2011. This also means that Canadian prime rates will not change either.

The Central Bank’s press release addressed downside risks several times including global and national threats that will slow down economic growth:

“Financial market volatility has increased… The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies.”

An increasing concern is that Europe is expected go into a brief recession, with no indication of how brief this could be. The US will see weak GDP growth until next summer, and then hopefully bounce back soon afterwards. Growth in Japan and China is expected to slow due to weaker international demand, reducing inflation pressure on other countries.

At home, the forecasted recovery of the Canadian economy has gotten worse since the summer, and this is expected to continue until the middle of 2012. Consumer and business demand is expected to be the main growth driver. The Bank of Canada expects the national economy to grow by 2.1% in 2011, 1.9% in 2012, and 2.9% in 2013.

The threat of inflation has subsided and is not expected to return to the 2% target until the end of 2013. As a result, there is not much the Central Bank can do, given their main mandate is to keep inflation under control. Check. Job well done.

This is one of the reasons there has been recent news that the Harper government is considering expanding the Bank of Canada’s current narrow focus on containing inflation to a broader mandate. Finance Minister, Jim Flaherty, and Bank of Canada Governor, Mark Carney, are set to acknowledge that more flexibility is needed to ensure the Canadian economy has stable growth in the future.